The coronavirus pandemic has caused many problems worldwide. One of the strongest images here in the UK has been that of panic buying and supermarkets reporting a surge in sales. In my opinion, this represents an opportunity to pick up some stocks I have long admired.
Opportunity
Before the coronavirus affected markets, Tesco (LSE:TSCO) made strategic moves in Asia. Firstly, it announced the sale of 20% of its stake in Gain Land, a Chinese venture, which signalled its exit from the country.
Furthermore it announced sale of its operations in Thailand and Malaysia for £8bn ($10.6bn). CEO Dave Lewis confirmed £5bn of the proceeds would be returned to shareholders via a special dividend. As well as the windfall, Tesco will strengthen its position by using some of the money to reduce debt, which is always positive.
Crunching the numbers, Tesco has seen an increase in dividend per share year on year for the past three years, something I always look for when analysing a company. Its current price-to-earnings ratio sits at just under 17, compared to the FTSE 100’s 12. The share price has seen a dip in the last month, of course, of approximate 15%. I see this as an opportunity.
Management is looking to solidify Tesco’s position as the UK’s largest retailer with growth plans including investment of £1.2bn a year. This includes over 20 new fulfilment centres.
Online is king
The shift towards online shopping has been huge in recent years. Ocado (LSE:OCDO) is a major player in this realm. With supermarkets being inundated with customers and others opting to get their shopping delivered to their doorstep, it has seen demand cause technical issues. Ocado has decided to prioritise existing customers and virtually turn away new customers who are attempting to sign up during the current pandemic.
A fruitful strategic partnership with Marks & Spencer was kicked off in August 2019. Add to this international relationships with big supermarket chains in the US, France, Germany, and Japan, to provide the infrastructure behind online shopping, and Ocado’s future is bright.
Looking at the numbers, earnings were up approximately 12% despite posting a £214m loss to the year ending December 2019. This is due to investment in further fulfilment centres, technology advancements, and further infrastructure.
Reviewing the share price, it has almost come full circle in the past three months. Mid-December 2019 saw prices of approximately 1232p per share, and currently the share price stands at 1233p per share. There was a dip recent, but it has staged a mini fightback. A longer-term view shows the last five years have seen an increase of 230% in share price.
What I would do now
Looking at the reasoning and information available, I view both these stocks as potential FTSE 100 champions in the long term. I would not be put off by the short-term bumps in the road, but rather look at the bigger picture.
Supermarkets usually involve a certain amount of risk in my opinion but I would still carefully consider both of these for my portfolio.
